Investing to achieve your goals

How are your New Year’s resolutions progressing? Many of us start out with the best of intentions – to get fit, improve our diet, drink less, travel more, get out of debt or get ahead financially. But without clear goals and a plan to achieve them, our good intentions are likely to remain just that.

The good news is that it’s not too late to turn your New Year’s wish list into achievable goals. You give yourself the best chance of kicking goals if you focus on the process and break your long-term objectives into a series of steps.

Most meaningful goals require a change in behaviour that can’t be achieved overnight. If you’re a couch potato who dreams of running a half marathon, you need to learn to walk before you run. To develop the exercise habit, you may need to rise an hour earlier each day and team up with a buddy to encourage you to keep going. You may also need expert advice to create a detailed, personalised exercise plan and help measure your progress.

Goal-based investing

Financial goals require a similar approach. Take the long-term goal of saving for retirement. The traditional approach is to simply save as much as possible between now and then, with a focus on maximising investment returns after assessing your risk tolerance. Depending on your risk profile your money would be invested in an aggressive or defensive portfolio.

By comparison, a goal-based approach to investing aims to align your investments with your personal objectives. By asking where you want to be in 5, 10 or 20 years you can work out how much you need to save to achieve your goals and create savings habits to help you get there.

Rather than simply saving for retirement, you might aim to retire at 55 with enough money to live comfortably with regular overseas travel. To fund this lifestyle, you decide you need to generate income of $5000 a month for up to 40 years, bearing in mind that more of us will be living into our 90s.

Then you can begin to join the dots. Given your current age and income, you can work out how much you need to save each month and how much risk you need to take to reach your goal. If the risk required is out of your comfort zone, or your goal is financially out of reach, it’s time to adjust your plans. You could delay retirement, look for savings in your budget or modify your aspirations.

Measuring success

The typical approach to investing uses investment returns aligned to your risk profile to measure success. If you beat the relevant market benchmark you’re doing well. But it’s not much consolation to know you beat the ASX 200 index by 2 per cent if the market was down 20 per cent. It’s also not conducive to sleeping at night.

Success in goal-based investing is about being on track to fund your goals. You still need to monitor returns, but if you decide you want $60,000 a year in retirement, success is saving enough to get you there.

In practice, most of us have multiple goals that require extensive planning. You may want to buy a home, save for the kids’ education or an overseas holiday adventure as well as saving for retirement. Each goal has a different time horizon, which may call for a different investment strategy.

Generally speaking, you can afford to be less conservative with long-term goals because time is on your side. But if you’re saving to buy a home in two years’ time, your money needs to be accessible and not at risk of short-term market volatility.

The start of a new year is a great time to think about what you would like to achieve in the year ahead and beyond. If you would like some help with strategies to turn your resolutions into reality, give us a call on 03 9523 6500 or email info@mgaccountants.com.au

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